2020 Vision in the Year of the Metal Rat

‍(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long every stock in this post, except for FCX, BHP, RIO, and PHO.TO)

With 2019 and its lessons fading into the fog of market history, I believe there's reason to be optimistic about materials, energy, and gold going into 2020. This optimism is based on several converging factors:

• Coordinated Commodity Moves: A nascent coordinated move higher is visible in oil, copper, and gold on the charts.
• Investment Bank Calls: Many major investment banks are echoing similar bullish sentiments for these sectors.

Current Market Observations:

• Oil: Comfortably over $60, continuing its upward trajectory despite "prevailing wisdom." Geopolitical events have further strengthened its case. Canadian energy names are gaining popularity as investors seek defensible value in an otherwise expensive broader market.
• Miners: Copper is showing signs of life. Freeport (FCX.US) is up over 50% from its October lows, with BHP, RIO, and TECK up approximately 20% in the same period.
• Gold: Has definitively moved above the psychologically important US$1500 level. It notably held strong against a relatively robust dollar throughout 2019. Despite increased interest, a lack of committed bullishness among the broader investing public suggests potential for a sustained rally if this move is real.

Macro Influences and the U.S. Dollar

While I'm not a macro expert, I observe that supply, demand, and inventories are not the only drivers in commodity markets. The U.S. dollar (DXY) plays a significant role, often acting like a tide: a strong USD tends to depress commodity prices, while a weak dollar supports them.

• The DXY topped just over 99 in late September and has been trending lower, breaking chart support and falling below 97 for the first time since July.
• Part of this DXY weakness stems from the Fed's stance to hold interest rates until sustained evidence of inflation appears, effectively a green light for commodity rallies.
• This, combined with the coordinated upward moves in gold, copper, and oil, suggests brighter days for commodities.

The Energy Sector: A Shifting Narrative

The consensus view on oil has been negative for years. However, the narrative is shifting:

• Demand: Oil demand is projected to reach a record high of 101.5 million barrels per day in 2020.
• Market Balance: Forecasts generally point to a balanced market in 2020, with some predicting a supply deficit in the second half.
• U.S. Shale: Historically a key driver, U.S. shale drillers are now facing capital constraints and bankruptcies.
• Corporate Focus: Companies are prioritizing free cash flow, dividends, debt repayment, and positive returns on capital, transforming into more "real" businesses.
• Supply Concerns: The massive capital required to maintain U.S. shale production raises questions about future supply growth.
• Geopolitical Tensions: Elevated tensions in the Middle East could quickly cause supply shocks.

Despite the long-term shift to EVs, oil remains crucial to the global economy.

Copper: Powering the Green Future

I remain bullish on copper, with a sustained break below $2.50/lb as my only caveat.

• Green Energy Demand: A transition to green energy and electric vehicles will require "a veritable mountain of copper."
• Supply Challenges: Most of the world's largest copper mines are aging, and new supply requires significant investment.
• Key Level: I'm watching $3.10/lb (just above its 200-day moving average) as a confirmation of copper's recent breakout.

Gold: Floating Higher

At $1500/oz, many gold companies are generating strong cash flow.

• Fed's Stance: The Fed's "on hold" stance provides gold with "free rein to float higher."
• Supportive Factors: Central bank buying and negatively-yielding sovereign debt are broadly supportive.

My Resource Picks for 2020 (The Wide Net)

I cast a very wide net in the Canadian resource market. These are brief insights into some of the names I follow:

Oil & Gas Producers (The Torque Plays)

Advantage Oil and GasAAV.TO ($2.63)Good trio benefiting from AECO gas system update, rising condensate demand, and Montney confidence. Riding the trend.Painted PonyPONY.TO ($0.77)Same as AAV.TO.Arc ResourcesARX.TO ($8.15)Same as AAV.TO.Athabasca OilATH.TO ($0.62)Maximum leverage to rising oil prices. Trades cheap on FCF yield and discount to reserves. Anticipating a re-rate with Q1 2020 reserve updates.Altura EnergyATU.V ($0.355)High-quality management (Peyto, Storm board members). Drilling first horizontal well in the new Entice play (Q1 2020). Focusing on reserves and production growth per share.Vermillion EnergyVET.TO ($21.25)High yield (~13%). Diversified, sculpted business model for sustainable dividends. Confident in oil/gas demand.TransGlobe EnergyTGL.TO ($1.85)Dirt cheap oil. Drilling an appraisal in Western Desert. Potential windfall from Eastern Desert license extension. A value trade.

Copper & Base Metals (The Electrification Plays)

Arizona MetalsAMC.V ($0.50)Exploration story in Arizona. Large VMS deposit previously poked by Exxon. Expecting initial drill results in Q1 2020.Copper MountainCMMC.TO ($0.75)Producer, cheap on NAV. Part of the copper basket to benefit directly from higher prices.Capstone MiningCS.TO ($0.77)Producer, cheap on NAV. Part of the copper basket.First QuantumFM.TO ($12.75)Copper major. Cobre Panama is a frequently cited large-scale acquisition target.Excelsior MiningMIN.TO ($1.03)In-Situ Leach (ISR) project in Arizona. Low-cost producer (AISC $\sim\$1.30/\text{lb}$ range). First copper production expected this quarter. Cheap on NPV but waiting for Phase 1 performance.Murchison MineralsMUR.V ($0.13)Under-followed VMS camp exploration in Saskatchewan, backed by Rob McEwan. Excellent access/infrastructure. Drilling 12 targets soon to prove camp scale.NGEX MineralsNGEX.V ($0.45)Lundin Group. Big bulk tonnage copper-gold deposit in Chile. Potential synergies with nearby Caserones mine.Josemaria ResourcesJOSE.TO ($0.76)Lundin Group. Big bulk tonnage copper-gold deposit in Argentina. More likely a standalone project.Trevali MiningTV.TO ($0.235)Zinc/base metals. Traded at $1, now under $0.25. Same company, same share count, improving outlook. A value speculation near historical lows.

Gold Explorers & Producers (The Safety & Leverage Plays)

Aurion ResourcesAU.V ($2.03)District-scale gold in Finland with high-grade showings. Well-funded, target-rich. Hoping for a "eureka" moment at Launi or Aamurusko.Lundin GoldLUG.TO ($8.63)Two words: Lundin. Gold. High-quality asset and team.Gold X MiningGLDX.V ($2.53)Massive 7.4M oz resource (M+I) in Guyana, trading for $\sim\$10/\text{oz}$ in the ground. Strong economics above US$1400/oz. Frank Giustra support. Likely acquisition target if gold holds above $1500.Minera AlamosMAI.V ($0.305)Steady "up and to the right" chart. Financing secured for Santana (production in 2020). Low capex, quick payback, backed by Osisko. Significant resource expansion potential.Northern Shield ResourcesNRN.V ($0.09)Management bet. Drilling soon at Shot Rock (Nova Scotia) and Root & Cellar (Newfoundland) epithermal gold projects. Model-driven, Big-E exploration approach. High potential if they make a discovery.NuLegacy GoldNUG.V ($0.08)Go big or go home exploration in the Nevada Cortez Trend (Carlin-style). Drilling ongoing, hoping for "the next Goldrush." A high-risk slot machine pull.Steppe GoldSTGO.TO ($0.90)Mongolia-based, dirt cheap gold production with significant expansion potential. Need a few quarters of successful production to re-rate.Canex MetalsCANX.V ($0.155)Tiny market cap grassroots exploration in Arizona (Gold Range). High-grade gold veins found at surface over 3km strike length. Looking to drill in Q1. High risk, high reward.Cantex Mine DevelopmentCD.V ($1.18)Fall from grace but signs of optimism. Fipke buying stock. Waiting for assays from the extensive summer/fall program. Hoping for a rekindling of the high-grade tiger tail up at North Rackla.Orestone MiningORS.V ($0.075)Cheapest market cap I follow. Interesting copper target in Chile underneath past mining. Need financing, but a copper bucket filler.Sun MetalsSUNM.V ($0.225)Good system, good team. Complex multiphase mineralization capable of high grades. Searching for the size that sets the story alight.

Other Materials & Tech (The Niche Plays)

Colonial CoalCAD.V ($0.375)Metallurgical Coal (necessary for steel). Trades at a fraction of its NPV. New director suggests interest from the Indian coal scene. Potential for India to come knocking in H1 2020.Aurora SolarACU.V ($0.075)Sells tools to improve efficiency in solar panel production. Last quarter was best ever, sales ramping in China. Lumpy revenue, but potential acquisition target (e.g., by Photon Control).Cronos GroupCRON.TO ($9.30)Cannabis oddball. Trading near 52-week low but sitting on $\sim\$2$ billion in cash. Speculation due to Altria's control and marketing expertise. Buyer's market for acquisitions.Neo LithiumNLC.V ($0.50)High-quality Lithium (3Q project in Argentina). Scale, grade, and low impurities. Large cash position $30relative to market cap $60M.Critical ElementsCRE.V ($0.37)Hard-rock Lithium. Good project and management connections in Europe. Hoping for a strategic partner to capitalize on EV battery demand.OneSoft SolutionsOSS.V ($0.60)Pipeline integrity management software. Best-in-class, next-generation solution. Belief from Microsoft, Phillips66, and WorleyParsons. Waiting for insurers/industry to mandate deployment.

Conclusion: Wide Net, Nimble Strategy

This list might cover half of what I own and about 1/10th of what I track, but the strategy is clear: casting a very wide net reduces overall risk to any single story.

Friends often want one or two tickers, but if we are entering the kind of market I anticipate, starting with a wide field allows me to winnow down as the real winners emerge.

The "rising tide" of coordinated moves in gold, oil, and copper suggests I'm in a good place and can remain nimble. I collect these names over long periods; the hard part is knowing which bets to press and which to reduce.

There is a lot of interesting activity in Resource Land, and this broad optimism is significant because it comes at a time when very few people have appreciable exposure to gold, energy, and materials after years focused on large caps and cannabis stocks.

Happy hunting in 2020, the Year of the Metal Rat in the Chinese Zodiac. Auspicious perhaps? Here's hoping.

Malcolm Shaw

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